The Re-reincarnation of Keynesian Economics

The above is (almost) the title of a NBER working paper by Gregory Mankiw from 1991. It highlights the susbstantial difference between new Keynesian economics and the convictions of early Keynesians, he writes in the abstract. In the paper Mankiw issues a list of ‘dubious Keynesian Propositions’ (I am not making this up.). Here it is:

Learning how the economy works is best achieved by a careful reading of Keynes’s General Theory.

The lessons of classical economics are not helpful in understanding how the world works.

Capitalist economies are threatened by the posiibility of excess saving, which could lead to secular stagnation: deficit spending is, therefore, good for the economy.

Fiscal policy is a poweful tool for economic stabilization, and monetary policy is not very important.

Policymakers should learn to live with inflation, because it is the cost of low unemployment.

Policymakers should be free to exercise their discretion in responding to changing economic conditions and avoid adherrence to a rigid policy rule.

So, that was 1991, this is 2012. Where are we now? Let me first point out the following. If Mankiw would have believed in his first dubious Keynesian proposition, than he would not have come up with some of the other points. He would have understood that Keynes would not have agreed with the propositions 2, 4 and 5 because they are not derived from the work of Keynes. The problem here is that Keynes and Keynesians fell apart in their positions without noticing it – the latter perhapd did notice it, but the former did not because he was dead. Anyway, this confusion is not Mankiw’s fault.

Proposition 1. then, is a bit of a strawman-Keynesian proposition, since nobody actually ever wrote that. Proposition 3 has made a powerful comeback: saving too much and investing it unwisely can lead to really, really big economic problems. Point 6 is something which at least Europeans are willing to discuss. After all, we had lots of rules (Maastricht and all that) and still the economy is in shambles. Following more rules and stricter rules is what some propose, but it seems very doubtful that this would help.

Only 21 years ago Gregory Mankiw published his paper, and still about the only thing that still looks good is his conclusion Does Macroeconomics Make Progress? ‘In some ways,’ he writes, ‘the history of macroeconomic thought seems like a pendulum swinging between two views of the economy. On the right is the classical view of a well-functioning economy, on the left is the Keynesian view of an economy fraught with market failure.’

UPDATE 28/01/2012: I have deleted the last sentence which before read: ” Hmmm… maybe it IS the pendulum?” I read what I wrote but still don’t know what I thought.